Ahead of Wall Street - October 3, 2012

Spain’s reticence to ask for a bailout remains on the back of investors’ minds even as we got a reassuring-enough labor market reading from payroll processor Automatic Data Processing (ADP) this morning. The ADP report is showing modestly better-than-expected private-sector jobs of 162K in September, while the gains in preceding two months were revised lower.

The August tally was lowered by 12K to 189K and the July number was reduced by 17K to 156K. The consensus expectations was for September gains of about 153K.

The biggest increase came from smaller firms (firms with fewer than 50 employees), adding 81K jobs, while medium and large businesses added 64K and 17K jobs in September, respectively. Service sector jobs increased by 144K in September, down from 175K in August, while goods producing sectors added 18K. Importantly, the construction sector added jobs for the fourth straight month, adding 10K jobs in September, the strongest monthly run rate since March, when favorable weather helped construction activities.

The expectation for Friday's BLS report ahead of this morning's ADP report was for headline gains of around 118K. But given the disconnect between the ADP and BLS readings last month, it is unlikely that we will see any material revisions to those expectations following this release.

The key takeaway from this ADP report coupled with what we have been seeing in recent months is that the labor market is modestly improving at a pace somewhere in the 100K to 150K range. But this pace of improvement is just enough to keep the unemployment rate steady at current levels. For a significant drop in the unemployment rate, we need a much faster pace of job gains.

Of course the labor force participation rate, currently at a record-low level, is a key variable as well in how fast the unemployment rate could fall. And the participation rate is not just a function of cyclical elements as demographic factors are having a bearing on it as well.

In corporate news, Family Dollar (FDO) came in-line with earnings and revenue expectations this morning, while Monsanto (MON) came modestly short of expectations. Monsanto shares have been strong performers lately as other agriculture-centric names have faltered due to drought concerns. It will be interesting to see if the stock can sustain its momentum following today’s miss.